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Natural Monopoly Question

Posted 11 April 2012 - 09:40 PM

SkyTrooper

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Help me respond to this econ professor:

His claim: There are "natural monopolies". For example, electric utilities (owners of the power lines at least) can not all run wires to your house. It is reasonable for only one utility to run the wires and therefore they hold a natural monopoly over the delivery of electricity. The production of electricity can therefore be competitive, but not the delivery. You can't have ten sets of wires strung across the city and sticking out of your house.

As a consequence, the monopolist can charge as high rates as they like within the range where substitutes would become practical (ie. where you would buy your own generator).

Therefore, natural monopolies must have their prices set by the state/ closely regulated.

I have all Ayn Rand's fiction and non-fiction if you'd just like to point me to where this has already been addressed by her. Thanks.

Posted 12 April 2012 - 07:02 AM

This is an economic rather than a philosophic question, so Rand is not your best source. I can think of a few points, and they probably aren't the only ones:

- Natural monopolies can't regulate how much of the product you use; they can't avoid competing with your decisions about this. If electricity becomes too expensive, you cut back on your use, and they sell less. The economic term for this is elasticity of demand, and energy is a classic example.

- Switching providers isn't practical (with present technologies) as long as you stay in one place, but households and businesses move around and utility prices are a factor in picking a location. Energy providers and real estate developers have incentives to bring customers to their area.

- Said impracticality applies only to the "last mile," which gets power from the grid to the end user. People routinely can and do switch wholesale providers (e;g; some companies will let customers elect to buy "green" energy only. Gore was in the news a few years ago for refusing to make this election, which would have added a few percentage points to his $2000 monthly bill. Power companies switch suppliers even if end consumers don't, and they have the aforementioned incentives to keep us using the product.

Finally, I wonder if keeping prices down is the real rationale for these regulations. If it were, you'd expect shortages (which always follow from price controls). You'd also expect the power and telecommunications companies to have opposed such laws. According to the little history that I know, they lobbied and propagandized for their monopolies.

Posted 12 April 2012 - 07:05 AM

Spiral Architect

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I got this question when I took a night class on Econ years ago and I got a laugh out of the whole class with this: "So what you are telling me is that the free market can place satellites in geosynchronous orbit, do microscopic surgery with lasers, or even allow me to pay anyone anywhere in the world instantly from my bank account with plastic, but it cannot run a wire into my house? Really?” Also this is not a natural monopoly. Natural monopolies occur without the Government forcing them. Utilities are regulated and restricted by Government fiat so are coercive monopolies. This is simply an excuse to let the Government restrict access to privileged members (people who pay for bridges to well connected groups).Challenge the professor, or the people in class, as to how they would do it if they owned a Utility and had to run it on the moral principle of free association. What if they had to actually think about solving the problem to get people’s business? Ingenuity is a wonderful thing and certainly a better fuel for advancement then “I don’t know so the government should pick the most connected business to do it.”

Posted 12 April 2012 - 09:11 AM

Dormin111

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If you take the question from the other side, ask, "how does the state know what price to charge?"

If they charge too low of a price then this disincentivizes the production of more energy as energy companies will be woried about being hijacked by the state and losing their sizeable investment. If prices are too high then the state is using its power to rob people for corporate interests (what generally happens). And of course, the state cannot actually determine what the "right" price is because of the knowlege problem.

Posted 12 April 2012 - 10:10 AM

Reason_Being

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Well he admits that the production of electricity is competitive. So they can't really charge whatever they want because a more affordable provider would provide competition.
He claims that delivery of electricity is limited to one set of wires set up by a single company, this would not necessarily be the case in a free market. That would only be possible with a government-guaranteed monopoly on this type of infrastructure, or if the market determines this. He claims that it is "reasonable" for only one provider to run the infrastructure, but unless he gives an explanation as to why that is the case, his point is moot.

As for his claim that the government must then set the prices, that's not difficult to refute. Just allude to the fact that, without the electric company, people wouldn't have electricity. By saying that the government should dictate the price, he is claiming that simply having the ability to provide electricity makes the company morally obliged to provide it. Ask him what moral right the government has to force the company to trade at any given rate, and what the ethical implications are when a government sets prices. This means that the government must apply force against an individual and determine for the individual how much he values his own labour, and by extension how much he values his own life. Once he is forced to address ethics, his argument will quickly crumble. That's the thing about many economics professors. They are good with numbers economic theory but they flat out suck at philosophy.

Posted 12 April 2012 - 11:44 AM

As a consequence, the monopolist can charge as high rates as they like within the range where substitutes would become practical (ie. where you would buy your own generator).

He defeats his own argument with that quote, as he acknowledges that they are in fact in competition with other entities in the marketplace. Why is this a problem?

I would say that electric wires run to your house is just one method of delivering energy, there are many alternatives that would be in competition with that method of delivering energy, alternatives technologies like solar power and wind. Even natural gas combined with fuel cell technology could compete.People could also explore alternatives like purchasing less power by building more energy efficient homes and business. Large user like manufacturing could go back to producing there own like they used to.

Posted 02 May 2012 - 04:00 PM

He defeats his own argument with that quote, as he acknowledges that they are in fact in competition with other entities in the marketplace. Why is this a problem?

I would say that electric wires run to your house is just one method of delivering energy, there are many alternatives that would be in competition with that method of delivering energy, alternatives technologies like solar power and wind. Even natural gas combined with fuel cell technology could compete.

I've always found this track to be particularly effective since it gels with those sorts' views on gas prices and fuel efficient cars. If they charge as much as possible below the second best thing available then that "overly" high profit margin becomes the incentive that drives research and mass production efforts with alternatives in the same way that $4 gas makes shale oil attractive and $9 gas makes a Prius into a wise decision.

It is not the critic who counts; not the man who points out how the strong man stumbles,
...or where the doer of deeds could have done them better.
The credit belongs to the man who is actually in the arena,
whose face is marred by dust and sweat and blood, who strives valiantly;
who errs and comes short again and again; because there is not effort without error and shortcomings;
but who does actually strive to do the deed; who knows the great enthusiasm, the great devotion, who spends himself in a worthy cause,
who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least he fails while daring greatly.
So that his place shall never be with those cold and timid souls who know neither victory nor defeat.-Teddy

Posted 02 May 2012 - 04:34 PM

softwareNerd

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You can't have ten sets of wires strung across the city and sticking out of your house.

In most urban and suburban areas, one could easily have two or three sets of wires, with each consumer tapping in to the one he uses. With today's technology, one can even imagine multiple production companies agreeing to share the delivery network, the way some states are forcing them to do today. If people really had to think about this, without the current government-enforced utility rates, they would have to plan for it. Long-term contracts are likely to be more common, including clauses that deal with long-term price-changes.

| Check out my Blog |So many otherwise intelligent men want to raise other men to their mountain top by marching them up at gun point.

Posted 02 May 2012 - 04:42 PM

In most urban and suburban areas, one could easily have two or three sets of wires,

Even more if you consider that they can be laid underground. There could easily be 50 sets of wires buzzing under the streets with little inconvenience.

It is not the critic who counts; not the man who points out how the strong man stumbles,
...or where the doer of deeds could have done them better.
The credit belongs to the man who is actually in the arena,
whose face is marred by dust and sweat and blood, who strives valiantly;
who errs and comes short again and again; because there is not effort without error and shortcomings;
but who does actually strive to do the deed; who knows the great enthusiasm, the great devotion, who spends himself in a worthy cause,
who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least he fails while daring greatly.
So that his place shall never be with those cold and timid souls who know neither victory nor defeat.-Teddy

Posted 18 May 2012 - 02:48 PM

kowalskil

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If you take the question from the other side, ask, "how does the state know what price to charge?"

If they charge too low of a price then this disincentivizes the production of more energy as energy companies will be woried about being hijacked by the state and losing their sizeable investment. If prices are too high then the state is using its power to rob people for corporate interests (what generally happens). And of course, the state cannot actually determine what the "right" price is because of the knowlege problem.

The price cannot be less that what it costs to operate the system. The government can treat the overhead as a form of taxation, for example, declairing it to be 30% of the minimal cost.

Ludwik Kowalski (see Wikipedia).

Edited by kowalskil, 18 May 2012 - 02:51 PM.

Ludwik Kowalski, author of a free ON-LINE book entitled “Diary of a Former Communist: Thoughts, Feelings, Reality.”

http://csam.montclair.edu/~kowalski/life/intro.html

a testimony based on a diary kept between 1946 and 2004 (in the USSR, Poland, France and the USA).

The more people know about proletarian dictatorship the less likely will they experience is. Please share the link with those who might be interested, especially with young people, and with potential reviewers. Thank you.

Posted 18 May 2012 - 08:06 PM

The price cannot be less that what it costs to operate the system. The government can treat the overhead as a form of taxation, for example, declairing it to be 30% of the minimal cost.

Ludwik Kowalski (see Wikipedia).

I am not sure what you mean or how it adresses the point. The government can charge ANY price if it wants to, even if the utility operation does run at a loss since they can just perpetually bailout the operation with taxes. The issue is one of "social optimization" (to use a socialist term). The government cannot predict the optimal price without the pricing mechnism in place. They could try a bunch of phony market-aping techniques, but ultimately they will be highly innefficient and continue to come back to the same problem.

Posted 21 May 2012 - 06:51 PM

Hairnet

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It doesn't really follow that the state should set prices on anything though. After all the state itself is a monopoly and apparently it is trustworthy enough to exist. If he says natural monopolies are bad he should embrace one of the many forms of Anarchism, not liberal hypocrisy.

Peace is not an absence of war, it is a virtue, a state of mind, a disposition for benevolence, confidence, justice.
- Baruch Spinoza

Posted 28 May 2012 - 09:36 AM

JMeganSnow

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In most urban and suburban areas, one could easily have two or three sets of wires, with each consumer tapping in to the one he uses. With today's technology, one can even imagine multiple production companies agreeing to share the delivery network, the way some states are forcing them to do today. If people really had to think about this, without the current government-enforced utility rates, they would have to plan for it. Long-term contracts are likely to be more common, including clauses that deal with long-term price-changes.

Not to mention the (still somewhat far-out) research into delivering power wirelessly, via an antenna. There's also development into creating massive nuclear-powered "batteries" capable of providing power to a housing division for ten or more years. Or people can buy home generators and simply purchase FUEL instead of electricity. (Many people in my area do this because if the power goes out in a storm, their sump pump may shut off, resulting in a flooded basement.)

The one-wire-per-house setup is a *market solution* that largely came about due to independent businesses being interested in efficiency. It was a bit wild and woolly when the country was first being electrified, with power companies running wires and setting up power stations all willy-nilly. The current setup would probably have kept evolving in all sorts of interesting new directions if the government hadn't stepped in and laid down a bunch of regulations.

I doubt there's any "natural" monopoly out there that can't be shown is actually no such thing.

Posted 28 May 2012 - 09:39 AM

The price cannot be less that what it costs to operate the system. The government can treat the overhead as a form of taxation, for example, declairing it to be 30% of the minimal cost.

Ludwik Kowalski (see Wikipedia).

On the contrary, the correct price CAN be less than what it costs to operate the system in a particular form, in which case it shouldn't be built in the FIRST place. Anything set by the government is not a "price", it is a fee or a tax. Prices are set by the market.

Posted 31 May 2012 - 04:28 AM

wisdomlover

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Nothing is stopping a private company from doing the same thing. People believe that technology is static; that is cannot develop any more than it already has. Who's to say that a private company can't innovate a way to better compartmentalize electricity? The market is a brilliant thing. Nothing is more innovative than the competitive human mind.